A few weeks ago, we talked about the importance of periodically re-visiting the beneficiary designations on your Individual Retirement Accounts (IRAs) and your 401(k)s and 403(b)s because it is very easy to pick someone as a beneficiary and not review that choice for years or even decades. When an account owner dies, the "old" beneficiary may not be the person the account owner really "wanted".
However, another common error involves naming an estate as a beneficiary. This designation should generally not be used unless it has been approved by a lawyer or other investment professional. The reason for this is when an estate is named as a beneficiary, the payout period may be reduced. If the account in question is a Roth IRA, the account must be fully dispersed within five years. If the account is a Traditional IRA, the payout period varies according to the age of the deceased account holder. If the account holder was age 70 and a half or older, the distribution schedule would be based on the life expectancy of the person who died. If the decedent was age 72, that isn't too bad but if the decendent was 85 or 90, the distribution period would be quite short. Also, if the person were not yet 70 and a half, the distribution schedule would revert to just 5 years. So, if it is important to preserve the ability to stretch out the IRA, you must name an actual person as the beneficiary, not an estate.